1. Recession India

In economics, a recession is a general slowdown in economic activity over a sustained period of time, or a business cycle contraction. During recessions, many macroeconomic indicators vary in a similar way. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization, household incomes and business profits all fall during recessions. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.

Predictors of a recession Although there are no completely reliable predictors, the following are regarded to be possible predictors.  In the U.S. a significant stock market drop has often preceded the beginning of a recession. However about half of the declines of 10% or more since 1946 have not been followed by recessions. In about 50% of the cases a significant stock market decline came only after the recessions had already begun.  Inverted yield curve, the model developed by economist Jonathan H. Wright, uses yields on 10-year and three-month Treasury securities as well as the Fed's overnight funds rate. Another model developed by Federal Reserve Bank of New York economists uses only the 10-year/three-month spread. It is, however, not a definite indicator; it is sometimes followed by a recession 6 to 18 months later.  The three-month change in the unemployment rate and initial jobless claims.  Index of Leading (Economic) Indicators (includes some of the above indicators).

Stock market and recessions Some recessions have been anticipated by stock market declines. The real-estate market also usually weakens before a recession. However real-estate declines can last much longer than recessions. During an economic decline, high yield stocks such as fast moving consumer goods, pharmaceuticals, and tobacco tend to hold up better. However when the economy starts to recover and the bottom of the market has passed, growth stocks tend to recover faster. There is significant disagreement about how health care and utilities tend to

recover. Diversifying one's portfolio into international stocks may provide some safety; however, economies that are closely correlated with that of the U.S. may also be affected by a recession in the U.S.

Causes of a recession Many factors contribute to an economy's fall into a recession, but the major cause is inflation. Inflation refers to a general rise in the prices of goods and services over a period of time. The higher the rate of inflation, the smaller the percentage of goods and services that can be purchased with the same amount of money. Inflation can happen for reasons as varied as increased production costs, higher energy costs and national debt. In an inflationary environment, people tend to cut out leisure spending, reduce overall spending and begin to save more. But as individuals and businesses curtail expenditures in an effort to trim costs, this causes GDP to decline. Unemployment rates rise because companies lay off workers to cut costs. It is these combined factors that cause the economy to fall into a recession. Other reasons could be high interest rates. High Interest Rates Cause Recession High interest rates are also a cause of recession. That's because it limits liquidity, or the amount of money available to invest. In spite of the stock market decline in March 2000, the Federal Reserve continued raising interest rates to a high of 6.25% in May 2000. The Fed didn't start lowering rates until January 2001, and lowered them about 1/2 points each month, resting at 1.75% in December 2001. This kept interest rates high when the economy needed low rates for cheap business loans and mortgages. One of the causes of the current recession was that the Fed was also slow to raise interest rates when the economy started to boom again in 2004. Low interest rates in 2004 and 2005 helped created the housing bubble. Irrational exuberance set in again as many investors took advantage of low rates to buy homes just to resell. Others bought homes they couldn't afford thanks to interest-only loans. Spurt in demand of products of a particular sector (like it was the cause of 2001 recession, in which dot com companies were the pioneers of business regime), etc.

What Caused the Recession of 2001? The recession of 2001 is a great example. In 1999, there was an economic boom in computer and software sales caused by the Y2K scare. Many companies and individuals bought new

computer systems to make sure their software was “Y2K compliant” This meant that the operating code would be able to understand the difference between 2000 and 1900, since many fields within that code only had two spaces, not the four needed to fully differentiate the two dates. As a result, the stock price of many high tech companies started to increase. This led to a lot of investors' money going to any kind of high tech company, whether they were showing profits or not. The exuberance for dot.com companies became irrational. It became apparent in January 2000 that computer orders were going to decline, since the shelf life of most computers is about two years, and companies had just bought all the equipment they would need. This led to a stock-market sell-off in March 2000. As stock prices declined, so did the value of the dot.com companies, and many went bankrupt. Cause of Current Recession In 2006, when higher rates finally kicked in, declining housing prices caught many homeowners who had taken loans with little money down. As they realized they would lose money by selling the house for less than their mortgage, they foreclosed. An escalating foreclosure rate panicked many banks and hedge funds, who had bought mortgage-backed securities on the secondary market and now realized they were facing huge losses. By August 2007, banks became afraid to lend to each other because they didn't want these toxic loans as collateral. This led to the $700 billion bailout, and bankruptcies or government nationalization

of Bear

Stearns, AIG, Fannie

Mae,

Freddie

Mac,

IndyMac

Bank,

and Washington Mutual. By December 2008, employment was declining faster than in the 2001 recession.

Effects of recession in India India's high economic growth, second only to China among the major economies, declined due to the global economic crisis. Economic growth in India during FY2008-09 stood at 6.7%, beating the prediction of 6% growth by most analysts. The global crisis had relatively less impact of India because exports account for only 15% of India's GDP, less than half the levels in other major Asian economic powers such as China and Japan. However, unlike other major Asian economies, India's government finances were in poor shape and as a consequence, it was not able to enact large-scale economic stimulus packages. Despite this, from June 2008 to June 2009, industrial production in India grew by 7.1%. The former Indian Finance Minister P. Chidambaram said that he expected India's economy to "bounce back" to 9% during FY2009. India's Prime Minister Manmohan Singh said that the government will take measures to ensure that the economic growth bounces back to 9%. The Asian Development Bank predicted India to recover from weakening momentum in 4-6 quarters. At the G20 Summit, India called for coordinated global fiscal stimulus to

mitigate the severity of the global credit crunch. India said that it would inject US$4.5 billion into the financial system to help exporters. Some analysts pointed that India's growing trade with other Asian countries, especially China, will help reduce the negative impact of the crisis. Analysts also said that India's high domestic demand and large infrastructure projects will act as a buffer reducing the impact of the global downturn on its economy. Economists argued that India's financial system is relatively insulated and its banks do not have significant exposure to subprime mortgage. In an editorial, the New York Times praised the strong regulations placed on the Indian banking system by the Reserve Bank of India. In May 2009, India reported an economic growth rate of 5.8%, beating most forecasts. Overview: In trading, there has not been as much impact of recession on Indian economy as for other countries. This is only because of its lower export relying nature. Impact on India: •

A slowdown in the US economy is bad news for India.

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Indian companies have major outsourcing deals from the US.

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India's exports to the US have also grown substantially over the years.

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Indian companies with big tickets deals in the US are seeing their profit margins shrinking.

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More people have sold the shares in the indian share market than they bought in the recent weeks. This has added to the fall of sensex to lower points.

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One danger meanwhile is of a dip in the employment market. There is already anecdotal evidence of this in the IT and financial sectors, and reports of quiet downsizing in many other fields as companies cut costs.

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More than the downsizing itself, which may not involve large numbers, what this implies is a significant drop in new hiring -- and that will change the complexion of the job market.

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Many companies has laid off their staffs, the number of tourists inflow to india has come down, companies have cut down compensations and perks etc, government and other private companies are reluctant in starting new ventures and starting new projects etc.

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Projects that are halfway to completion, or companies that are stuck with cash flow issues on businesses that are yet to reach break even, will run out of cash.

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one of the casualties this time could be real estate, where building projects are halfdone all over the country and in this tight liquidity situation developers find it difficult to raise finances.

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The only way out of the mess is for builders to drop prices, which had reached unrealistic levels and assumed the characteristics of a property bubble, so as to bring buyers back into the market, but there is not enough evidence of that happening.

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Consumers are also frozen in this sudden glare of the headlights.More expensive money means that floating rate loans begin to bite even more; even those not caught in such a pincer will decide that purchases of durables and cars are not desperately urgent.

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At the heart of the problem lie questions of liquidity and confidence.

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What the RBI needs to do, as events unfold, is to neutralise the outflow of FII money by unwinding the market stabilisation securities that it had used to sterilise the inflows when they happened.

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This will mean drawing down the dollar reserves, but that is the logical thing to do at such a time.

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If done sensibly, it would prevent a sudden tightening of liquidity, and also not allow the credit market to overshoot by taking interest rates up too high.

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Meanwhile, there is an upside to be considered as well.

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The falling rupee (against the dollar, more than against other currencies) will mean that exporters who felt squeezed by the earlier rise of the currency can breathe easy again, though buyers overseas may now become more scarce.

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Overheated markets in general (stocks, real estate, employment-among others) will all have an element of sanity restored.

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And for importers, the oil price fall (and the general fall in commodity prices) will neutralise the impact of the dollar's decline against the rupee.